EURCAD is the Better Way to Play Europe, AUDUSD Tracks the Dow

Members of the DailyFX team continue to trade the Australian Dollar as a proxy for moves in the Dow Jones and S&P 500, and a near-perfect 5-day correlation between the AUDUSD and DJIA underlines the effectiveness of the alternative. The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) likewise remains very strongly linked to broader risk sentiment.

But what if you don’t want something that moves with the Dow? Robert Sinche, Head of FX Strategy at RBS Securities, recommends trading the Euro/Canadian Dollar pair as an attractive trade relatively uncorrelated to the S&P 500.

The Australian Dollar clearly remains an excellent proxy for moves in stock markets, but what if you want to play the Euro without a “risk” component? In a recent interview on CNBC, Robert Sinche, Head of FX Strategy at RBS Securities, said that the EURCAD remains an attractive proxy for all of what’s going on in the Euro Zone.

If you believe that the European fiscal crisis will worsen, you may want to be short EURCAD. The opposite is also true: material (if unlikely) improvements in Euro Zone crises could push the EURCAD higher.

Sometimes the lack of correlation makes a specific trading security attractive. We agree with Mr. Sinche; the EURCAD seems an attractive play on Euro Zone troubles with little exposure to moves in broader financial markets.

The Australian Dollar continues to hold its very strong correlation to the Dow Jones Industrial Average, offering an attractive proxy to holding positions in the key US equity index. In fact, several members of the DailyFX Team continue to trade the AUDUSD as a direct alternative to equities. Unlike the Euro/US Dollar, the Australian Dollar/US Dollar pair remains relatively unaffected by unpredictable headlines coming out of Europe.

You can trade the Australian Dollar if you want to play pure ‘risk’ moves and want to avoid the mess surrounding European fiscal crises. We expect the AUDUSD to remain a strong proxy to trading the Dow Jones and other risky asset classes.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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